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by / Published in Economics

Market interactions are typically distorted due to the market power that monopolies have. Goods produced are fewer and prices are raised in order to achieve greater margins, using a market skimming approach. Where government does not sponsor a monopoly, they may form out of mergers or even naturally out of innovation. Legal provisions aim at certain behaviors when a company is in a dominant position, but not on being in a dominant position itself.

Government Sanctions

The role of a government monopoly is that of inducing creativity by granting companies rights to the fruits of their innovation. Other reasons why governments sanction this structure is to foster investments in a risky venture or sustaining a domestic interest group. Tools to sanction monopolies can be from patents, trademarks, copyrights etc. Sometimes due to the sensitivities attached to an industry, the government may enter the business by itself and create a state-monopoly.


Barriers to entry are insurmountable. These can be brought about by economies of scale, where companies are able to produce more goods at progressively cheaper prices, capital requirements (as with a large factory), technological superiority etc. There may also be no close substitutes for the product. Control over natural resources and network externalities are additional reasons for creating and sustaining a monopoly. Profits are set to be maximized, and the price maker has control over the price of goods or service. The company becomes the industry; depending upon the elasticity of the market, there may be more sales for less price and vice versa.

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